The public debt questions the Budgets

The public debt questions the Budgets


When Pedro Sánchez assumed the presidency of the Government, he inherited the challenges that the previous Executive was already facing to resume the best economic course. Marked with fluorescent and between exclamations was the reduction of the public debt, the trace of the crisis that seems indelible. However, the Budget agreement that the Socialists have signed with Unidos Podemos questions whether the commitment can be fulfilled.

The document includes measures such as raising the minimum interprofessional salary to 900 euros, eliminating the health co-payment or recovering the unemployment subsidy for people over 52 (now 55), which imply a cost for the public coffers. According to the calculations, the increase in spending will be more than 5,000 million euros in 2019. On the other hand, it estimates that it will raise almost 5,700 million with its fiscal policy, which means new features such as raising two points of the maximum rate of IRPF for the rents over 130,000 euros, the creation of a tax for certain digital services or other financial transactions.

What will be entered with these fiscal initiatives can not be calculated as accurately as the expected cost. Perhaps for this reason, BBVA Research differs from the Government's estimates, considering that the expenditure will be two tenths higher over the Gross Domestic Product, while the collection will be less between one and two tenths of the GDP.

The forecasts of BBVA Research are closer to the reality posed by the International Monetary Fund for Spanish public debt, which would close next year at 95.8% of GDP, and in 2023 would have only reached 92.6%. While the Minister of Economy, Nadia Calviño, said that it will descend at a higher rate and in 2019 it will be 95.5%. The Executive's vision, therefore, is quite optimistic. Especially when, on the same day, the Government itself acknowledged that economic growth continues to slow down when the estimates of GDP increase decrease to 2.6% in 2018 and to 2.3% in 2019.

Slowdown

The increase in GDP will be even more important if the debt is reduced if it is desired to increase public spending, since it would compensate the balance. "Economists tend to use the Public Debt-GDP ratio as an indicator. Therefore, although the public debt is not reduced, even if it grows, if the GDP rises even more, the indicator ends up falling. If the economy rises less it is more difficult for this indicator to fall, which increases the fragility of a government that needs to finance itself, "says Esade professor Pedro Aznar.

To make matters worse, the slowdown could worsen in the coming months due to the numerous threats that overfly international economic stability, such as the Argentine and Turkish crises, the trade war waged by the United States, or Italy's challenge to the European Union. "The global outlook is worse than a few months ago, generates uncertainty, distrust in the markets, which affects the value of the wealth of families, and the fear of the new boom of protectionism is affecting the export capacity of many countries slowing down significantly economic growth, "says Aznar, for whom the current context is not favorable to increase public spending.

European Central Bank

And it is that this policy further weakens the possibility of reducing debt, a task that in itself was complicated. More when, from December, the European Central Bank will abandon the expansive programs with which, since March 2015, it has purchased debt from its member countries in order to clean up its accounts. Specifically, until the end of September it had acquired Spanish bonds for a value greater than 256,000 million euros. In this way, the ECB owns almost a quarter of our debt.

The withdrawal of these stimuli, explains the professor of Economics at the CEU San Pablo University Roberto Carrasco, is a natural process that is already occurring in the US "and, if we look how they have reacted there, we must be optimistic, although the characteristics "Donald Trump has made the end of the expansive monetary policy with tax cuts and in Spain and other European countries we want to do just the opposite. The political stability of Europe and the ideological orientation in several countries will be very relevant to the effects of this measure and the much-needed reduction of public debt to pre-crisis levels. "

With the ECB normalizing its policy, the next step taken by the entity will be to raise interest rates, well into 2019. In the US, the Federal Reserve has already started this path gradually, and Carrasco maintains that if in Europe there is the same way, "should not have a significant impact on public spending".

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State bonus

What does affect this is the perception of the sovereign bond market on the Budget, and it has not sat well with it. Four days after announcing the agreement, investors in the Spanish 10-year bond were willing to buy them but with an interest rate of 1.7%, while at the end of March, it reached only 1.16%. A high interest rate, which affects the debt that is being renewed, may mean that "when the Treasury conducts future auctions it will be forced to pay them at a higher interest, which implies more public spending," says Professor Aznar.

More public spending because financing the debt would be more expensive, an effect that could be transferred to individuals and companies, which would also suffer higher costs in their financing: "If this finally occurs, it ends up negatively impacting the investment capacity of companies and can affect consumption ", highlights Aznar.

Income forecast

In addition, he adds that the market has penalized the Spanish public debt by raising the interest rate "because it considers the income forecast to be too credible, excessively optimistic in terms of the collection capacity of the new measures", pointing in the same direction as the BBVA Research.

In the same way, Roberto Carrasco does not trust that the Government's estimates will be enough to cover all the expenses foreseen in the Budgets. Thus, he denies Calviño's claim that Spain, in 2019, will have a primary surplus, that is, it will collect more than it spends: "It is not serious or credible to think that, only by increasing fiscal revenues, we will achieve a surplus. Balancing our balance of payments only through higher income (more taxes) is going back to failure, "he says. It seems that Sanchez has not taken the right path.

The risk premium warns

The risk premium (with respect to that of Germany), the main indicator to measure the uncertainty generated towards the economy of a country, has already reacted to the agreement signed by the Government and Unidos Podemos for the 2019 Budgets. The document was signed on October 11 and, that same day, the risk premium grew by 5.9%, from 108 points to 114. And a week later, on Thursday 18, it was already at 120. The teacher of Economics of the San Pablo CEU University Roberto Carrasco is clear that "the risk premium has increased in recent days, probably motivated by the ambiguity of the PGE 2019". And the level of this indicator has a direct effect on all investment decisions. In fact, it is the real reason why the 10-year Spanish bond interest rate has increased after the agreement was signed, since investors interested in this product have verified, with the growth of the risk premium, that Spain has lost solvency and has generated uncertainty for the future in the short and medium term. And to make matters worse, the situation in Italy also contaminates the Spanish indicators.

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